Reduce the Forced RRIF Minimum Withdrawal

Minimum RRIF (Registered Retirement Income Fund) withdrawals should be reduced to at least their pre-1992 amounts.

Prior to 1992, the minimum RRIF payments were significantly less than they are today. At that time, the minimum withdrawal amounts were calculated using a pre-defined formula of 1/(90-Age). If you were a 72-year-old withdrawing funds from their RRIF, the minimum withdrawal amount would have been 5.55 per cent of the total value (1/18).

Today that same 72-year-old has a minimum withdrawal requirement of 7.48 per cent (an increase of approximately 35 per cent).This effectively forces seniors to take out more than their RRIFs are able to generate on their investments. In 1992, government of Canada bonds were paying 8.5 per cent interest, today those same duration bonds are paying less than 3 per cent.

A large number of retirees have RRIF portfolios that are heavily comprised of bonds based on their belief that these are the safest investments. While I may not agree with that statement, I can’t argue with the fact that many of these retirees are now being forced to encroach on the principal of their RRIFs since the yields are so low.

Some of you reading this may be thinking, “so what’s the problem?” Well, here’s the problem: say you’re 72 years old and you only need 6 per cent from your RRIF to maintain your lifestyle. Under the previous limits, you could take your 6 per cent and leave the rest within the account to accumulate. Under the new limits, you’re forced to take more money than you require. This results in more taxes payable today and less money in the future.

You may think that having more money than you need is a nice problem to have, but the amount of money isn’t the main issue here. Consider this: if a retiree were allowed to leave their money in their RRIF until later in life, they could potentially use the money to cover increased health care costs or other unforeseen expenses (not as part of a required withdrawal).

It’s obvious that the 1992 changes to RRIF withdrawals were put in place so the government can get their taxes earlier; however, as with a number of government initiatives, there are unintended consequences.

Life expectancy is still increasing, and people have to be prepared to make their retirement savings last longer. Unfortunately, these higher withdrawal requirements are forcing more and more people to run out of money later in life. What the government should be doing is reducing the minimum withdrawal limits. It makes no sense to me that you should be forced to take 20 per cent out of your RRIF when you’re 90 years old simply because of your age. Everyone knows that there are more and more centurions every year.

When you think about it, what would be wrong with letting people leave their money in their RRIFs until they need it? If they don’t need it, they can leave it in until death. These accounts will roll over to their spouse on a tax-deferred basis, but on the second death it’s fully taxable. The tax owing on the eventual estate would probably result in more tax revenue for the government because it’s all added to the deceased’s income in the year of death.

If the government doesn’t like the idea of removing withdrawal minimums, they should at least peg minimum RRIF withdrawals to current government bond yields. Forcing someone at age 72 to take out 7.48 per cent when they’re only earning 2.5 per cent is simply not fair. If a retiree depletes their RRIF account, it ultimately falls on the government to assist in their well-being through GIS, OAS, and other social benefits, which will cost more in the long run. I think it’s time for the Canadian population to have some say in how they use their hard-earned retirement savings. Reduce the withdrawal requirements and everyone benefits.